I have for months argued here that the experts have got it wrong. City analysts tell you that by slashing interest rates and by investing $99 billion in new infrastructure projects China can avoid a hard landing and its economy can “land softly” before growing again rapidly next year. The experts have already been shown to be wrong and a massive crash is already underway. As I have noted before your China exposure should be precisely nil.
I shall explain where socks and walnuts come into it below. But let’s start with last week’s stimulus package. For months experts have suggested that by slashing base rates the PRC could avert a hard landing. It has done that already and still the economic data gets worse and worse. That is because it is the wrong medicine. China has a structural issue that it is only going to make worse – the misallocation of capital.
Capital was either misallocated because the Government picked winning sectors (i.e. solar) and so effectively handed over vast amounts of state cash to build capacity there. Or because the banks lent money on very dodgy covenants to marginal enterprises (often because they were leaned on by the Government to do so). This worked as a policy when you could suppress the value your currency so pump out cheap exports to everyone else. But, as you may have notice, China’s main export market (Europe) has issue and the US also has issues. And so demand has just dried up.
As such, across the board China has huge overcapacity. Slashing base rates and misallocating even more Government capital into vast infrastructure projects will not solve that overcapacity. That can only be solved by firms going bust. If you make money “cheap” that will not persuade folks to invest in loss making companies (eve if they make a real product) but will merely provide extra fuel for speculative bubbles which will crash even more spectacularly in the future.
And so on the real economy, I have already shown you data in the past six weeks to show the terrifying speed of the downturn in:
And now we turn to socks. Specifically a place known as “sock city” which is next to a place known as “sweater town” in Eastern Zhejiang province. This place used to produce one third of the world’s socks (apparently on average we each buy 2 pairs a year). But this year 73 sock firms have already gone bust leaving behind debts of hundreds of millions of Yuan. And is it getting better? Well the article which alerted me to this has a string of analysts blathering on about Government fiscal and monetary initiatives but we have heard it all before. I quote one of the big cheeses in socks, Mr Xu Liele who says “Things have not been so bad since 2003, when foreign buyers stayed away because of the Sars crisis.” Grim indeed. So how will the fiscal and monetary stimulus assist Sock City?
You can read about the crisis in Sock City here
But of course there are still some sectors booming in China. I have warned before that once the real economy really starts to tank then at some stage there are some vast speculative bubbles which will burst. Today I alert you to Walnuts. I kid you not. The price of a pair of walnuts (yes those things that grow around the world on trees with virtually unlimited supply) has gone up by 1000% in the past decade for thousands of Chinese who view them as an investment not something you eat at Christmas. There is now a whole industry based on walnut investing.
Those who thing China will have a soft landing probably also think that bubbles deflate and do not burst. Or maybe they actually think that Walnut investing makes sense?
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